4 Ways That Many 3rd Generation Business Owners Fail

Keeping the family business both “in business” and “in the family” after the second generation is trickier than most people realize — even those who are trying to make such a thing happen. For example, forty percent of family-run businesses manage to successfully pass to a second generation. This is not a surprising statistic; not every business venture has the “legs” to make a second generation successful, but many do. What’s surprising is that only thirteen percent of these well-seasoned businesses are successfully transferred to a third generation.

This phenomenon is commonly known as the “3rd generation problem.” This is a complex set of challenges that face the grandchildren of business founders who decide to take the helm of an enterprise that was in motion long before they were born. There are four main groups of challenges that a third generation business owner has to overcome to really take charge successfully.

Way 1: “If I had my way…”

Conflicting opinions in the controlling family can greatly undermine a successful transfer of leadership. In the first generation of a family business, the chain of command is clear. Within the family, people know who is involved with the business and who is not. However, as the family structure grows, it gains more complexity as it gains members, and exponentially more family members become involved with the outcome. As a result, more of them get very strong opinions about “how things should be done.” Some of them can be quite vocal about it.

Failure to fully support the younger generation in a business transition can be fatal to the business. Conversely, the younger generation needs to have the vision and persuasion skills to build a strong consensus around change. Many times the younger generation has at least some formal business education; but all too often these college programs are built around academic theories – not real-world practice. In the real world, a rolled-up college degree is not a magic wand; additional training in persuasion techniques might be a very wise move – stuff they don’t teach in college. Great Aunt Ida might have been wholly intimidating when the heir apparent was five years old; yet even she must be convinced to lend her stern, grizzled support.

Way 2: “But we’ve always done it this way!”

Organizational momentum within the business can be both good and bad; the trick is figuring out which behaviors are holding things together… and which are holding things back. Resistance to technology can be a common problem, but technology-for-technology’s-sake can be a disruptive, cash-gobbling mess as well. A third-generation business owner needs to practice some objectivity about analyzing operations; consultants and mentors are one way to accomplish this. Another is to have taken some specialized training in business systems analysis. Unless the problem is glaringly obvious — “what do you mean we don’t have email??” – the general rule is “no sudden moves.” Observe and consult; and when the move becomes clear, act decisively.

Another momentum issue: changes in the marketplace may have radically changed the industry sector surrounding the business. For example, a company may have started out making a fortune with pagers, but those companies which didn’t follow the market trend into cellular phones suddenly found themselves with a rapidly-eroding customer base and too much capital tied up in going the wrong direction. These kinds of assessments take a very keen eye and good long-range market intelligence; just assuming what has worked in the past will always work in the future is a sure way to get outmaneuvered.

Way 3: “It won’t work that way.”

Change resistance within the business is almost a “given;” but this is something a little different. Often it’s the senior staff involved in daily operations — the very ones the transition team has to rely on – that can be the biggest nay-sayers. They may not even mean to be, it’s just that over the years, they’ve become experts in why things are “not possible” instead of figuring out ways to make good changes work. Other employees mask chronic pessimism as so-called skepticism and may undermine successful transition with poor attitude and water-cooler gossip. Some of these bad operators will have to be discovered and managed through retraining or other education. Some… may just have to go. Henry Ford once said, “If you think you can or you think you can’t; either way you are correct.” A successful third-generation transition needs to have everyone on board.

Reliable, positive people are the heart of any company. The reputation and success of the business rides on their initiative, willingness to adapt and daily activities. As a third-generation business owner, it doesn’t matter if the senior plant manager used to give you piggy-back rides if he’s not finding ways to carry your banner forward today. Be aware of “expert blindness:” when folks decide they know it all and stop learning anything new. It’s that attitude that led to this actual quote from the 1920’s: “The wireless music box [radio] has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” Who indeed? As amusing as this is in retrospect, market experts at Blockbuster didn’t see Netflix coming, either… so this is very much a current problem to be aware of.

Way 4: “I’ll just go my own way.”

As a family becomes more diverse, its traditions and customs, as well as the attitudes towards work and play will change. Very often, the third generation family designate may fail to fully engage in their new role. They may not have really wanted to take over the family business, but did so out of a sense of duty or family responsibility. Maybe they really wanted to do something else with their life.

This is very tricky, because the new business owner may lack the passion and attentiveness that makes a transition successful. Understanding the nature of their real, innate drive for fulfillment can be a nuanced bit of “mind control;” that is, the ability to control one’s own mind and impulses, desires and the need to “go play” instead of tending to the less-satisfying details of the family business.

Outside interests in the third generation are not necessarily a bad thing; properly implemented, they can bring diversity to a company’s activities and philosophy. Successfully integrating new business ventures are like marrying new bloodlines into a family; bringing strength through contrast if they are a happy “fit.” There are cases where there is no common ground… and this contributes to the low percentage of successful third-generation legacy business in operation.

If one thinks about a kingdom as a family business, royal families face this challenge constantly, managing it more-or-less successfully from within — but they have royal training behind them. A hereditary local plastics company does not, nor does it usually have the organizational underpinnings that make generational transitions an expected and natural event.

Business succession is never easy, but with a little preparation and an awareness of the nature of the potential generational pitfalls, it is possible to do it just the “successful way.”